Global Economics

Pro Sports Are Starting to Score in Russia

Thanks to a booming economy and enormous investments in Russian sports, teams are showing prowess on the field—and the fans are loving it

Russia hasn't seen anything like it for years. In Moscow and other cities, the streets reverberated with the sound of cars honking their horns, while thousands of ecstatic revelers poured outside. They celebrated throughout the night, waving Russian flags, punching the air, and chanting "Russia! Russia! Russia!" Such was the euphoric reaction on June 18, when Russia's national soccer team defeated Sweden 2-0 in Innsbruck, qualifying for the European quarterfinals for the first time in 20 years.

The historic win is just the latest sporting triumph to have delighted Russia. There was similar rejoicing on May 14, when Russian club Zenit St. Petersburg defeated the Glasgow Rangers to win the UEFA Cup Final. Just four days later, Russia also won the World Hockey Championship, beating Canada to gain the title for the first time in 15 years. Russians reflect that the string of sporting triumphs is symbolic of a new zeitgeist, coming at a time when the country's economy is booming and its national prestige and self-confidence are at post-Soviet highs. "Russian sport is on the rise," says Alexander Razuvaev, head of research at Russian bank Sobinbank. "Of course, if there are achievements, you can turn them into a business," he adds.

In fact, the link between sporting success and wider economic trends is more than just a happy coincidence. Russia's recent prowess on the sports field reflects huge investments in sports made over recent years by large Russian corporations and wealthy tycoons. Many are now flush with cash because of high global commodity prices, allowing them to plow hundreds of millions of dollars into buying clubs, renovating stadiums, and rewarding players and trainers. "A lot of companies have invested in sports, and what you're seeing now is a result of those investments," says Alexei Krasnov, president of the sport marketing agency Sportima.

Rolling in Cash

Russia's national soccer team is a case in point. Over the past two years the team has received tens of millions of dollars in funding from the National Football Academy, an organization financed by tycoon Roman Abramovich (best known in the West for his ownership of top English club Chelsea). That has included money for a new stadium, a new training complex, players' fees, and a €4 million ($6.24 million), two-year contract for the team's star trainer, Dutchman Guus Hiddink.

It's a similar story at Russia's leading soccer club, UEFA Cup winner Zenit St Petersburg, which was acquired by national gas concern Gazprom (GAZP.RTS) in December, 2005. Since then, Gazprom has splashed out on everything from new players to a new stadium. Thanks to the energy company's largesse, the club's budget is $120 million this year, up from just $25 million in 2005. Although still a far cry from the $400 million budgets of the top European clubs such as Manchester United or Real Madrid, Zenit is already in the same financial league as second-tier European clubs such as Stuttgart or Everton.

Other leading Russian clubs have also been acquired by large corporate owners and have budgets in the tens of millions of dollars. For Russian business, the fashion for investing in sport stems from various motives. Many top Russian businesspeople, such as Abramovich and Gazprom boss Alexei Miller, are keen soccer fans who are to some extent indulging personal fancies.

Sports sponsorship is also seen as a way of demonstrating social responsibility and currying favor with the Kremlin. Perhaps mindful of the Soviet glory days, when sporting success was inextricably linked with international prestige, the Kremlin now regards development of sport as a matter of national policy. For example, Russian companies have already pledged to invest billions into the Sochi 2014 Olympic Games, the crowning glory of the Kremlin's pro-sport policy (BusinessWeek.com, 7/5/07).

Not Bad for PR

Leading businesses such as Gazprom also argue that funding for sports is an effective form of corporate public relations. Gazprom, which has faced obstacles to its expansion in Western Europe, is keen to familiarize skeptical Western consumers with its brand—and evidently regards the millions spent on Zenit as money well spent. "It's obvious that it's very good PR: for Gazprom, for Russia, and for St. Petersburg," says Sobinbank's Razuvaev.

It isn't as clear whether Russian sports teams will eventually return the millions now being plowed into them. Some football clubs are even mulling the possibility of initial public offerings, following the successful model used in England. "I don't doubt that eventually Russian clubs will be able to achieve incomes comparable to the leading clubs in Europe," says Leonid Fedun, vice-president of Russian oil company Lukoil (LKOH.RTS) and the manager of leading Moscow club Spartak. He points out that when he acquired the club in 2004, its annual revenues were just $4.5 million. Last year, he notes, they exceeded $30 million, with more than half coming from advertising. In five years, he predicts, revenues will exceed $100 million.

But for the foreseeable future at least, few investors in Russian sports can expect to turn a profit. The size of the investments means most Russian soccer clubs still run at a big loss. And Russia has a long way to go before sports enthusiasm reaches the levels seen in the West. "The popularity of sport here is not comparable to Europe and especially the U.S.," says Sportima's Krasnov. "After the collapse of the Soviet Union it was a hard time, and people didn't have much time to think about sport."

That's starting to change. As incomes rise, and the corporate investments of recent years pay off in the form of greater success on the field, public interest in sports is rising. The current Euro 2008 championship is a case in point. According to TNS-Gallup (TNS.L), 67% of Russian adults watched the Russia-Sweden match on June 18, establishing a new record for any Russian television broadcast (even beating the President's annual New Year address). In comparison, the 2004 European soccer championship was followed by just 40% of the population.

Indeed, it's striking that because of Russia's large population, Euro 2008 has more viewers there than in any other country in Europe. That's surely an interesting statistic for international advertisers, some of which have already spotted the medium's potential. Samsung, the Korean electronics manufacturer, recently signed advertising contracts with trainer Hiddink and Spartak forward Roman Pavluchenko. Since then the two stars have become a ubiquitous sight on TV ads and gigantic billboards plastered around Moscow, promoting Samsung's high-definition TVs.

Others are closely watching the trend in Russia. "Economic growth and income levels are rising, the telecommunications market is strengthening, and the sponsorship and commercial rights market is burgeoning," says Simon Chadwick, director of the Birkbeck Sport Business Centre at the University of London, who recently authored a report on the economic impact of Euro 2008. "But my sense is that it will be the next tournament in Europe when we will really begin to see the impact of Russian growth starting to take hold."

What's already clear is that Russia's relatively strong showing so far can only fuel business' burgeoning interest in Russian soccer and the Russian sports market in general. "Before this championship nobody believed much in the Russian team," says Krasnov. "The results will increase the interest overall toward football, the ratings—and, of course, the budgets."